The Role of Collateral in a Model of Debt Renegotiation
Abstract
This paper studies the effect of debt renegotiation on the design of optimal loan arrangements in a model of borrowing and lending with asymmetric information. Renegotiation may occur because bankruptcy involves costly asset liquidation, which is ex post inefficient. The author shows that the extent of the entrepreneur's liabilities in the optimal loan contract depends upon the creditor's commitment to impose bankruptcy should default ever occur. A limited liability arrangement is optimal whenever the creditor is precommited not to forgive any portion of the outstanding debt. Otherwise debt may efficiently be secured by outside collateral. Copyright 1994 by Ohio State University Press.Download Info
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Bibliographic Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 26 (1994)
Issue (Month): 1 (February)
Pages: 72-86
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Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:1:p:72-86
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879
For corrections or technical questions regarding this item, or to correct its listing, contact: (Robert Roslyn) or (Christopher F. Baum).
Related research
Keywords:Other versions of this item:
- Helmut Bester, 1990. "The Role of Collateral in a Model of Debt Renegotiation," CEPR Financial Markets Paper 0001, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
- Bester, H., 1990. "The Role of Collateral in a Model of Debt Renegotiation," Discussion Paper 1990-60, Tilburg University, Center for Economic Research.
- Bester, H., 1990. "The Role Of Collateral In A Model Of Debt Renegotiation," Papers 9060, Tilburg - Center for Economic Research.
References
References listed on IDEASPlease report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Benjamin, Daniel K, 1978. "The Use of Collateral to Enforce Debt Contracts," Economic Inquiry, Oxford University Press, vol. 16(3), pages 333-59, July.
- Huberman, Gur & Kahn, Charles M., 1988. "Strategic renegotiation," Economics Letters, Elsevier, vol. 28(2), pages 117-121.
- Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
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